Food for thought on the big picture and inflation ahead of the Fed
The nominal federal funds rate is currently 2%. But the Consumer Price Index is rising at a 4.2% year-over-year rate. That means REAL, inflation-adjusted interest rates are NEGATIVE 2.2%. Money isn’t just cheap. It isn’t just free. It’s BETTER than free. In fact, rates haven’t been this deep into negative territory since 1980!
That’s not all. Since the beginning of 1980, the real funds rate has averaged POSITIVE 2.4%. Just to get real interest rates back to "normal" (and assuming the inflation rate remains constant), the Fed would have to hike the nominal funds rate all the way up to 6.6%!
Forget the debate over the language in the Fed's post-meeting statement, or whether the Fed will push through a 25-basis point hike or two later this year. Instead, think about this: The Fed would have to more than TRIPLE the nominal funds rate to get the real funds rate back in line with its historical mean.